Wednesday, 19 October 2011

Stocks end higher despite China slowdown, higher inflation and Europe's debt crisis

Optimism returned to markets on Tuesday. Reuters reports:

World stocks and the euro edged higher, while the S&P 500 jumped 2 percent on Tuesday following another report on deals to bolster the euro zone's rescue fund...

Britain's Guardian newspaper reported France and Germany have reached a deal to enlarge the euro zone bailout fund to 2 trillion euros ($2.76 trillion) in a bid to contain the region's debt crisis. The rescue fund, known as European Financial Stabilization Facility (EFSF), is currently worth 440 billion euros...

The MSCI world equity index ended up 0.21 percent, reversing sharp earlier losses.

Asia had driven the early losses in stocks, the MSCI Asia Pacific Index falling 2.4 percent and the Hang Seng Index in particular falling 4.2 percent.

One reason for the fall in Asian stocks was a report from China showing that its economy decelerated to the slowest growth rate in two years in the third quarter. The National Bureau of Statistics reported on Tuesday that the economy grew 9.1 percent, down from 9.5 percent in the second quarter.

Meanwhile, there was good news for the US economy. The National Association of Home Builders reported on Tuesday that its housing market index rose to 18 in October from 14 in September.

However, the good news was tempered by another report that showed that inflationary pressures remain. US producer prices rose 0.8 percent in September, the most in five months, after being flat in August.

Certainly, inflation remains high in the UK. The Office for National Statistics reported on Tuesday that consumer prices rose 0.6 percent last month, taking the annual inflation rate to 5.2 percent, the highest since September 2008.

High inflation, though, is unlikely to trigger monetary policy tightening in most countries as long as Europe's debt problem remains unresolved.

Indeed, the latter seems to be getting worse. Tuesday saw Moody's cutting Spain's credit rating to A1 from Aa2.

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